Do I Need a Financial Advisor? Making the Case for Financial Advice, Part 2: Paying for Value, Not Performance

So, Do I Need a Financial Advisor?

Maybe. Consider two important data points. First, a recent study by CNBC states that “99% of Americans don’t use a financial advisor.” A deeper look into this highlights that only 1% of survey respondents indicated use of a financial advisor. Second, a 2018 report by Dalbar indicates that the average individual investor makes bad investment decisions, underperforming the S&P 500 by a margin of more than 3% annually over 10 years, and by almost 6% annually over the 5-year period 2013-2017¹. This is irrespective of the choice to use index (passive) or active investment vehicles, and is purely a snapshot of all equity fund (stock-based ETF and mutual fund) investors. The annual study consistently reports that the primary culprit of underperforming is the average investor's inability to stick with an investment. On average, investors held an equity fund about 4 years, which is shorter than the average market cycle, and well short of a long-term, retirement-focused investment strategy. Fees, fund choice, and timing (of both the buy and sell of an investment) are factors that further enhanced the disparity. Dalbar’s data suggests that investors stay invested longer during bull markets, but fail to maintain a long-term investment strategy through the normal expansion and contraction (usually noticed by investors as a market decline) of a full economic cycle. In other words, people panic when the market is down. An advisor could help prevent this completely normal yet irrational reaction.

In the financial services world, though, we don't make finding help easy. Who do you call? There are brokers/stock brokers, investment managers, investment representatives, investment advisors, registered representatives, financial advisors/advisers, financial consultants, wealth managers, wealth planners, certified financial planners, and a plethora of designations and certifications. With so many variations on a theme, how do you know who to turn to for guidance?

Currently, the financial services industry is in the midst of regulatory changes that will help to ensure titles are not misused, and that abilities are not over-represented. You may soon see some “advisors/advisers” changing their title to “broker” or “representative” this summer, and hopefully that will begin to bring some clarity to the profession. Ultimately, you'll want to find an advisor who offers the services you're seeking, whether it's just help with choosing investments, or something more financially complicated.

What difference does the title make? To be concise, one professional is permitted to offer a recommendation that is suitable to your investment situation and risk tolerance (a registered rep), while the other, when working with you as an advisory client, has an obligation to make recommendations that are in your best interest, placing your financial interests ahead of their own (investment advisor representative; better known title – financial advisor). The broker-dealer I partner with, Voya Financial Advisors, already requires clear delineation between the roles of registered representatives (also known as a broker or investment broker) and investment advisor representatives (financial advisor, financial consultant, wealth manager/advisor). A financial advisor associated with Voya is an advisor required to place your financial interests ahead of their own.

What does a Financial Advisor actually DO?

The misconception about the financial advisor’s role(s) results from the wide-ranging variety, and quality, of services being offered. Financial advice implies many things, dependent upon the services offered by a particular advisor, and your financial goals and expectations. Often, the services include, or at least dovetail with, investment advice, financial/retirement/estate/income/college planning, help with debt consolidation and repayment strategies, budgeting, strategizing tax efficiency, determining appropriate insurance products, and more. Each client situation is unique, and the level of service varies, often determined by the client’s needs, wants, and goals. For each party involved in the relationship – advisor, client, and any external service provider (estate planner, tax professional, legal counsel, etc.) – the value being brought to the relationship will – or, at least, should – justify the cost.

Meanwhile, an ever-increasing mountain of data illustrates that an advisor who solely offers investment advice will have a difficult time consistently meeting client expectations, often finding themselves at the mercy of investment performance. So, if a financial advisor’s sole role is investment advice, and they don't beat the market, why would you pay them to manage your money? It’s important that you seek out an advisor that offers the service(s) you’re looking for. If you’re unsure of what you may need, be bold with your questions. One of two things could result: you'll either find a great advisor who can help, or you'll decide you're better off on your own.

3 Great Reasons to Pay for Financial Advice

Morningstar and Vanguard have both provided meaningful analysis of where and how financial advisors can provide value, emphasizing the importance of proper asset allocation, incorporating tax-efficient strategies, developing and planning retirement income streams, offering guidance with asset protection strategies, and serving as a behavioral coach. Properly executed, the value added well exceeds the advisor’s cost, and Vanguard’s research² has indicated that, for investors working with a financial advisor who offers comprehensive financial advice and retirement planning services, the net effect of good advice is an additional 3% return (assumes a 1% advisor fee).

Of course, there are endless resources available online for the DIY investor, from crowdsourced wisdom in various online chat forums to the family/friend of the family ‘adviser.’ Even robo-advice enables the self-sufficient investor a low-cost entry into the world of financial guidance. If you don’t need any additional service beyond investment selection, you may not need the services of a financial advisor, but I offer three reasons to consider working with one:

You get what you pay for. There is no right to recourse for receiving bad advice online, but a financial advisor who gives advice and provides services accepts (and is compensated for) a special role of trust, and the responsibilities that role entails. Long term, “free” advice may turn out to be more costly, because inaccurate, misinformed, or misaligned advice can have adverse effects on your retirement portfolio, and there is nobody (other than yourself) to share in the accountability.
When it comes to investing, we are our own worst enemy. Time after time, the data has proven that the majority of retail investors decide to buy into a market rally late, and sell (typically in a moment of panic/fear) when the market is near the bottom. Loss aversion (we feel and remember financial losses more than gains), herd mentality (copying the behavior of others, even if it means an unfavorable outcome), media response (reacting to news without examining the data for ourselves), and a number of other psychological traps trigger irrational action, which leads to underperformance. Serving as an emotional firewall during short term periods of panic, an advisor can help you keep the long term perspective.
Life is complicated. It’s easy, until we reach that inflection point where it’s not – kids, a mortgage, college savings, planning for retirement, and so much more. Oftentimes, an advisor can help bring clarity and structure to an increasingly full and complex life of everchanging, competing financial priorities. Maintaining our sanity can reap long-term dividends, and an advisory team can provide a wealth of assistance by helping you develop and track a long-term plan.

Ask Before Assuming

Many people think they can’t afford to work with a financial advisor, or that they don’t have enough saved. At PBC Insurance: Life & Financial Services, we work with clients in a variety of ways. While fee-only advisor firms will often require a minimum investment amount (because they charge a fee based upon invested assets), a fee-based firm, like ours, will work with you to develop an investment solution tailored to your situation (because we recognize that not every client is seeking the same level of advice, guidance, or planning). Give us a call, or use the contact form below to connect with us, and we’ll see how we can best be of service to you.

¹Dalbar, “2018 Quantitative Analysis of Investor Behavior.” 2018.

²Vanguard, “Vanguard’s Advisor Alpha®.” July 2018.